Vignette 1.5 - Was Socialism Egalitarian?
Vignette 1.6 - In What Parisian Arrondissement Should You Live in the ...
Vignette 1.7 - Who Gains from Fiscal Redistribution?
Vignette 1.8 - Can Several Countries Exist in One?
Vignette 1.9 - Will China Survive in 2048?
Vignette 1.10 - Two Students of Inequality: Vilfredo Pareto and Simon Kuznets
CHAPTER 2
Vignette 2.1 - Why Was Marx Led Astray?
Vignette 2.2 - How Unequal Is Today’s World?
Vignette 2.3 - How Much of Your Income Is Determined at Birth?
Vignette 2.4 - Should the Whole World Be Composed of Gated Communities?
Vignette 2.5 - Who Are the Harraga?

…

This way of looking at income distribution through the prism of social classes did not change much with the key turning point in the history of economics, the replacement of classical “political economy” by the “marginalist revolution” that started around 1870 and focused on individual optimization rather than on broad economic evolution of social classes, nor did it change later with the synthesis of the two strands (classical and marginalist) under the title of “neoclassical Marshallian economics” (from the Cambridge economist Alfred Marshall) and its establishment in the mainstream position. It was only in the early 1900s that the distribution of income among individuals (not among classes) attracted the attention of Vilfredo Pareto, a Franco-Italian economist who taught at the University of Lausanne in Switzerland. (His contribution is highlighted in Vignette 1.10.)
It was around the same time that the data on personal income distribution became available for the first time. This went hand in hand with economic development (countries becoming richer) and a broader fiscal role of the state.

If the side doubles, the area quadruples; if the side triples, the area rises nine-fold. Another example: Gravity weakens by the inverse power of two with distance. If a spaceship doubles its distance from Earth, the gravitational pull on it falls to a fourth its original value. In economics, one classic power law was discovered by Italian economist Vilfredo Pareto a century ago. It describes the distribution of income in the upper reaches of society. That power law concentrates much more of a society’s wealth among the very few; a bell curve would be more equitable, scattering incomes more evenly around an average. Now we reach one of my main findings.

Cotter’s The 20% Solution (Chichester: John Wiley, 1995) provides in its introduction the right answer: “Figure out the 20% of what you do that will contribute the most to your success in the future, then concentrate your time and energy on that 20%” (p. xix). Cotter refers in passing to Pareto (p. xxi), but neither Pareto nor the 80/20 Principle (under any name) is mentioned outside the introduction, and Pareto does not even appear in the index. Like many writers, Cotter is anachronistic in attributing the 80/20 formulation itself to Pareto: “Vilfredo Pareto was a French-born economist who observed 100 years ago that 20% of the factors in most situations account for 80% of what happens (that is, 20% of a company’s customers generate 80% of its profits). He called it Pareto’s Law” (p. xxi). In fact, Pareto never used the expression “80/20” or anything like it.

…

The British publisher who had commissioned the work, a man well known for looking on the gloomy side, faxed me (remember faxes?) to say that despite the PR fiasco, the book was “selling very well.” In fact, the book has sold more than 700,000 copies worldwide and been translated into twenty-four languages.
More than a century since Vilfredo Pareto noted the consistently lopsided relationship between inputs and outputs, and a decade since this book reinterpreted Pareto’s principle, I think we can now say that the principle has stood the test of time. There has been massive feedback, mainly positive, from readers and reviewers. Throughout the world, a large number of individuals, perhaps hundreds of thousands, have found the principle useful, at work and in their careers, and increasingly in the whole of their lives.

…

Eighty percent of the energy is wasted in combustion and only 20 percent gets to the wheels; this 20 percent of the input generates 100 percent of the output!3
Pareto’s discovery: systematic and predictable lack of balance
The pattern underlying the 80/20 Principle was discovered in 1897, about 100 years ago, by Italian economist Vilfredo Pareto (1848–1923). His discovery has since been called many names, including the Pareto Principle, the Pareto Law, the 80/20 Rule, the Principle of Least Effort, and the Principle of Imbalance; throughout this book we will call it the 80/20 Principle. By a subterranean process of influence on many important achievers, especially business people, computer enthusiasts and quality engineers, the 80/20 Principle has helped to shape the modern world.

It is worth explaining exactly how these came about,
for they introduced the depersonalization of economics such that we no
longer consider the rich and the poor as the British economists of the
nineteenth century did: now we aim to maximize output, measured in a
rather particular but seemingly objective way, above all else. Power and
accolades ﬂow to those who can think of any way of increasing output
still further – whether or not it is feasible, or for that matter wise.
The story begins with the Italian economist Vilfredo Pareto who,
after an exhaustive empirical study of individual rich and poor families,
attacked the notion that one could compare and sum up individual
utilities to arrive at a judgment about societal welfare. He argued that
rich people and poor people might have such fundamentally different
tastes that it would be impossible to compare their utilities.

…

These workers will want
to buy more goods, which in turn means higher prices for goods and a
higher value of using additional labor. Thus using more labor might raise
instead of lower the value of the marginal product of labor, in which case
the determinacy of the theory breaks down (Keen 2001/2008).
One of the pioneers of neoclassical economics, Vilfredo Pareto,
already pointed out that the mainstay of the neoclassical theory of
income distribution among labor and capital was rather fragile. He
noted that it would break down if competition was less than perfect and
if the amount of labor to be employed with each unit of capital could
not be varied freely (e.g. as in the case of the bus and bus drivers where
you cannot use a bus efﬁciently at any given time without a driver, or
with more than one driver) (Fonseca 2009).

Write a function called plot_ccdf that takes a list of values and the corresponding list of probabilities and plots the CCDF on a log-y scale.
To test your function, use expovariate from the random module to generate 100 values from an exponential distribution. Plot the CCDF on a log-y scale, and see if it falls on a straight line.
Pareto Distributions
The Pareto distribution is named after the economist Vilfredo Pareto, who used it to describe the distribution of wealth; see http://en.wikipedia.org/wiki/Pareto_distribution. Since then, people have used it to describe phenomena in the natural and social sciences, including sizes of cities and towns, of sand particles and meteorites, and of forest fires and earthquakes.

They develop policies for housing, education, the environment, and so on, but treat our economic system itself—in which every silo affects every other—as off-limits. Wealth distribution is a particularly systemic phenomenon, a result of how all parts of our economy interact. It can’t be understood without viewing it at that level, nor can it be fixed without treating it at that level.
The Italian economist Vilfredo Pareto was among the first to notice that something in modern economies consistently concentrates wealth at the top. Early in the twentieth century, he observed that about 20 percent of the people in Italy owned about 80 percent of the land.1 Looking further, he saw the same pattern throughout Europe.

Karl Marx’s thousands of pages of passionate argumentation included extended technical discussions that, as economic historian Robert Heilbroner put it, are argued “to a point of mathematical exhaustion.” His contemporary, the Frenchman Léon Walras, identified economics as, fundamentally, a mathematical discipline, and Vilfredo Pareto, an Italian engineer and sometime economist, used his mathematical background to further the discipline as well.
But, as Gérard Debreu, a Nobel Prize–winning economist and president of the American Economics Association, wrote in 1991, it was only with the closing of World War II that “economic theory entered a phase of intensive mathematization that profoundly transformed [the] profession.”2 In 1940, less than 3 percent of the refereed pages of the thirtieth volume of the American Economic Review “ventured to include rudimentary mathematical expressions.”

…

These early economists aimed to tackle big questions about how the economy worked (and whether it could be made to work better), weighing in on such important matters as market function (and dysfunction), the origin of value, business cycles, and unemployment. It was set in motion by Smith and carried on for one hundred years thereafter by the classical economists—David Ricardo, Thomas Malthus, Karl Marx, Vilfredo Pareto, among others. It was continued for nearly one hundred years more by neoclassical economists like Thorstein Veblen, John Maynard Keynes, and an enduring hero of free-market proponents, Joseph Schumpeter.
Pareto, who lived from 1848 until 1923, is emblematic of both the worldliness and precision of these towering figures in the history of economic thought.

Although he organized his economic theory in Principles of Political Economy (1848) around the idea of this hyperrational being, the term Homo Economicus originated in the writing of Mill’s late nineteenth-century critics. See Joseph Persky, “Retrospectives: The Ethology of Homo Economicus,” The Journal of Economic Perspectives 9:2 (Spring, 1995): 221-231.
2 Named after the Italian mathematician Vilfredo Pareto, who first explicitly formulated this definition. See John Cunningham Wood and Michael McLure, eds., Vilfredo Pareto: Critical Assessments, 331.
3 The period of phenomenal technological and economic progress based on the development of electrical, chemical, steel, and petroleum industries from 1865 to 1900 is often described as the Second Industrial Revolution.

The late nineteenth century economists were able to show that this process of endless calculation could theoretically produce, through the magic of perfectly competitive markets, not only a general equilibrium in which all workers, machines, and resources were full employed, but also, under some restrictive (and unrealistic) assumptions, an optimum, or efficient, allocation of resources that offered the maximum amount of satisfaction, or utility, for society as a whole.
The notion of optimality used by economists from the late nineteenth century onward had limited practical relevance, but a huge ideological significance. Proposed by the Italian statistician Vilfredo Pareto, who later became an inadvertent hero of the Italian fascist movement, this concept stated merely that no one in society could be made better off without someone else suffering a loss. Pareto Optimality2 deliberately and consciously ignored the critical questions of interpersonal comparisons: Could the world be improved in some sense by taking a crust of bread from Rockefeller and giving it to a starving child?

Conclusion: What Is Next?
Notes
Bibliography
List of Figures
Acknowledgments
Index
The foundation of political economy and, in general, of every social science, is evidently psychology. A day may come when we shall be able to deduce the laws of social science from the principles of psychology.
—VILFREDO PARETO, 1906
PREFACE
Before we get started, here are two stories about my friends and mentors, Amos Tversky and Daniel Kahneman. The stories provide some hints about what to expect in this book.
Striving to please Amos
Even for those of us who can’t remember where we last put our keys, life offers indelible moments.

…

His discounted utility model with exponential discounting became the workhorse model of intertemporal choice.
FIGURE 5
It may not be fair to pick this particular paper as the tipping point. For some time, economists had been moving away from the sort of folk psychology that had been common earlier, led by the Italian economist Vilfredo Pareto, who was an early participant in adding mathematical rigor to economics. But once Samuelson wrote down this model and it became widely adopted, most economists developed a malady that Kahneman calls theory-induced blindness. In their enthusiasm about incorporating their newfound mathematic rigor, they forgot all about the highly behavioral writings on intertemporal choice that had come before, even those of Irving Fisher that had appeared a mere seven years earlier.

More precisely, under the stated assumptions of the theorem, the market economy delivers as much economic output as any economic system possibly could. There is no way to improve on this outcome, in the sense that no reshuffling of resources could possibly leave someone better off without making some others worse off.* Note that this definition of efficiency—Pareto efficiency, named after the Italian polymath Vilfredo Pareto—pays no attention to equity or other possible social values: a market outcome in which one person receives 99 percent of total income would be “efficient” as long as his losses from any reshuffle exceeded the gains that would accrue to the rest of society.
Distributional complications aside, this is a powerful result—one that is not obvious.

Newton, Isaac
New York Cotton Exchange
New Yorker, The
New York Mets baseball team
New York State Common Retirement Fund
New York Stock Exchange
New York Times, The
Book Review
New York University (NYU)
Stern School of Business
New York Yankees baseball team
Nightingale, Florence
“NINJA” mortgage loans
Nixon, Richard
Nobel Prize
noise traders
Nordhaus, William
Northern Rock
Norway
Nothaft, Frank
Obama, Barack
Objectivist Newsletter, The
October Revolution
oligopoly
“On an Economic Equation System and a Generalization of the Brouwer Fixed Point Theorem” (von Neuman)
O’Neal, Stan
On Liberty (Mill)
Only Yesterday (Allen)
“On the Economic Theory of Socialism” (Lange)
“On the Impossibility of Informationally Efficient Markets” (Grossman and Stiglitz)
Organisation for Economic Cooperation and Development
Organization of Petroleum Exporting Countries (OPEC)
O’Rourke, Kevin
O’Toole, Bob
Ove Arup
Ownit Mortgage Solutions
Oxford University
Pacific Investment Management Company
Padilla, Mathew
paradox of thrift
Pareto, Vilfredo
Pareto efficiency
Parker Brothers
Pasternak, Boris
Paulson, Henry “Hank”
Pearl Harbor, Japanese attack on
Pender, Kathleen
Penn Square Bank
Pennsylvania, University of, Wharton School of Business
Pentagon Papers, The
Pericles
Phelps, Edmund
Philadelphia 76ers basketball team
Philippines
Phillips, A.

…

Rather than confining myself to expounding the arguments of Friedrich Hayek, Milton Friedman, and their fellow members of the “Chicago School,” I have also included an account of the formal theory of the free market, which economists refer to as general equilibrium theory. Friedman’s brand of utopian economics is much better known, but it is the mathematical exposition, associated with names like Léon Walras, Vilfredo Pareto, and Kenneth Arrow, that explains the respect, nay, awe with which many professional economists view the free market. Even today, many books about economics give the impression that general equilibrium theory provides “scientific” support for the idea of the economy as a stable and self-correcting mechanism.

…

In Britain, in the second half of the century, scholars such as William Stanley Jevons, Francis Ysidro Edgeworth, and Alfred Marshall began to apply the methods of calculus in a more systematic fashion, developing formal theories—or “models”—of how consumers and firms behave, many of which are still taught today.
Most of these theories applied to individual firms and businesses. Building on the Tableau Economique (Economic Table) that François Quesnay, the eighteenth-century philosopher, had constructed, Léon Walras and Vilfredo Pareto, who both taught at the University of Lausanne, set out to create a coherent mathematical theory of the entire economy. Walras was born in northern France in 1834 and died in 1910. After trying his hand at fiction, journalism, and mine engineering, he followed the advice of his father, an economist, and devoted himself to economics.

So while the history of enfranchisement moves steadily—if slowly—in the direction of inclusion, the social contract must also accommodate the fact that management of affairs of state and market grow evermore complex and specialized. The result is a cycle of populism, anti-elite revolt, and oligarchic retrenchment, with each new ruling elite displacing its predecessor. “History,” as the Italian political economist Vilfredo Pareto once said, “is the graveyard of aristocracies.” And so it was for the Eastern Establishment that Mills chronicled. Its hold on power was thoroughly (and forever) disrupted by a number of social upheavals that culminated in the 1960s. As famously chronicled in David Halberstam’s The Best and the Brightest, Vietnam permanently destroyed the credibility of the “Wise Men” who straddled the upper echelons of both private business and public service.

…

During the late nineteenth century and into the twentieth, as democratic experiments spread throughout Europe, a group of theorists set themselves to the task of analyzing how it was that a small subset of citizens could retain de facto control over a society despite the downward pressures of democratization. One of those theorists was Robert Michels, whose Iron Law of Oligarchy offered a model for how to think about our own meritocracy.
Michels’s fellow theorists of the elite—Vilfredo Pareto, Gaetano Mosca, and José Ortega y Gasset—shared a similar descriptive analysis, though because they were hostile to egalitarianism, they viewed this as a feature rather than a bug. To them the “elite” was made up of both those with the most power and also those who deserved the most power. Central to their theories was a kind of proto-meritocratic vision of cream rising to the top, a conception of rule by the best, brightest, and noblest that stretches all the way back to the vision of the Greeks.

…

Political Parties: A Sociological Study of the Oligarchical Tendencies of Modern Democracy. Translated by Eden and Cedar Paul. New York: The Free Press, 1962.
Mills, C. Wright. The Power Elite. New York: Oxford University Press, 1956.
Moynihan, Daniel Patrick. Secrecy: The American Experience. New Haven, Conn.: Yale University Press, 1998.
Pareto, Vilfredo. The Rise and Fall of Elites: An Application of Theoretical Sociology. 1968. Reprint, New Brunswick, N.J.: Transaction Publishers, 1991.
Putnam, Robert D. The Comparative Study of Political Elites. Englewood Cliffs, N.J.: Prentice Hall, Inc., 1976.
Schleef, Debra J. Managing Elites: Professional Socialization in Law and Business Schools.

It is the toolbox economists employ today to analyze and illustrate a theory of consumer and firm behavior.
The European Wizards of Economics: Walras, Pareto, and Edgeworth
Marshall's work was followed up by the work of others in Europe and America who helped professionalize economics. Leon Walras (1834-1910) from France, Vilfredo Pareto (1848-1923) from Italy, and Francis Edgeworth (1845-1926) from Ireland introduced sophisticated mathematical methods and attempted to validate Adam Smith's invisible hand doctrine in mathematical form. The invisible hand idea, that laissez-faire leads to the common good, has become known as the first fundamental theorem of welfare economics (as noted in chapter 1).

Matching and assortative mating—connecting one well-off family to another—may make this all the less likely. And thus we can see some very natural reasons why income mobility, across the generations, is often either stagnant or declining over time. To use the language of early twentieth-century Italian economist Vilfredo Pareto, over time, the “circulation of elites” will naturally decline, at least compared to earlier situations of poverty and chaos. And indeed in China today, the special privileges held by children of prominent Communist Party members have become a major social issue and source of complaint.
In other words, the richer, more stable, and happier your society is, the harder it is to generate high or rising levels of income mobility over time.

Mayo’s description of the unconscious mind echoed Freud, his ideas about “reveries” and “passive obsessions” came straight from the French psychoanalyst Pierre Janet, and his celebration of spontaneous collaboration echoed the idealist British philosophers of the time. Finally, he co-opted Italian sociologist Vilfredo Pareto’s view that responsibility for preserving social order lay with the elite.
Adding it together, though, Mayo had arrived at an idea all his own. The solution to workplace strife, he argued, was a kind of therapeutic human relations, a soft alternative to the “bossism” of Frederick Taylor’s scientific management.

…

Over the next twenty years, a river of Rockefeller money—$1.5 million—flowed into Mayo’s program at the School. (It still stands as one of the most generously funded programs in the history of the social sciences. For Donham, who called fundraising an “almost intolerable burden,” it must have seemed like manna from heaven.) Once there, Mayo found another devotee of Vilfredo Pareto, Dr. Lawrence J. Henderson, a member of the Harvard Medical School faculty and a biochemist of international repute. An actual doctor in the company of self-appointed medics to the human soul, Henderson had pretensions in the other direction, and thought he could build a bridge between Pareto’s theories of societal equilibrium and the homeostasis of the human body itself.

…

Recalled Barnard: “In this case, and in countless others, men talk and fight about what they do not want, because they must talk about something, and they even convince themselves that they believe what they say.”3 The making of those enlightened gestures, along with a few other psychological manipulations thrown in for good measure, was pretty much all it took. The strike was over, and everyone went home peacefully.
In one sense, Chester Barnard was Vilfredo Pareto dressed in a Brooks Brothers suit. Like Pareto, Barnard saw organizations as “systems” analogous to the human bodies seeking equilibrium. To get there, an organization needed both effectiveness (the ability to meet goals) and efficiency (the ability to satisfy the individuals who worked for it).

This view was first articulated by Gaetano Mosca, who stated that the different regime types—monarchy, aristocracy, democracy—made little difference to actual life because all were in the end controlled by elites. The “political class” maintains itself in power under a wide variety of institutions and will simply use democratic ones to do the same. Even “Communist and collectivist societies would beyond any doubt be managed by officials.” The economist Vilfredo Pareto (familiar to economics students as the inventor of the Pareto optimum) made a similar case for continuing elite domination regardless of the type of regime. Based on his statistical studies of income distribution, he formulated a “Pareto’s law,” which argued that 80 percent of wealth was held by 20 percent of the population across time and space.

And influential laissez-faire economist Michel Chevalier negotiated the free-trade agreement between the U.K. and France in 1860—the same year he became a senator in the French Congress.
This long history of prominent economists influencing policy has continued. For instance, the Italian economist Vilfredo Pareto made important contributions to the study of income distribution and the analysis of individuals’ choices; but he was also a militant laissez-faire liberal who battled for free trade. And of course John Maynard Keynes, the very influential British economist, served in several key government posts during the twentieth century.

Twenty percent of the customers, Ethan said, produce 80 percent of the profits, yet most Chinese businesses were honed in on the 80 percent of the customers who produce only 20 percent of the profits. This, Ethan continued, had exposed most Chinese businesses to an endless course of rising costs and falling profits. (Having never studied economics in school, Ethan probably didn’t know that the 80/20 conundrum was one of the famous observations of Vilfredo Pareto, an influential conservative economist from the early twentieth century.)
“Our way out is to focus on the other twenty percent”—the people who produce the real profits, Ethan said. “The problem is making enterprises change their strategies from low price to high service. I think this is a very important development stage for Chinese companies.”

Following Jevons’s death in 1888, economists began to distance themselves from his psychological theories or methods.23 In place of Jevons’s theory stating that each pleasure and pain has its own discernible quantity, a theory of preferences was introduced in its place. As economists such as Marshall and Vilfredo Pareto saw it, economists have no need to know how much pleasure a pizza gives me, but only whether I would prefer to have a pizza or a salad. The way I spend my money is determined by my preferences, and not by my actual subjective sensations.
Gradually economists discovered that they could say less and less about what goes on in the minds of consumers, to the point where it’s enough to simply observe their use of money and assume the rest.

In Wikipedia article edits, for example, you would expect the second most active user to have committed only half as many edits as the most active user, and the tenth most active to have committed one-tenth as many. This is the shape behind the so-called 80/20 rule, where, for example, 20 percent of a store’s inventory accounts for 80 percent of its revenues, and it has been part of social science literature since Vilfredo Pareto, an Italian economist working in the early 1900s, found a power law distribution of wealth in every country he studied; the pattern was so common that he called it “a predictable imbalance.” This is also the shape behind Chris Anderson’s discussion in The Long Tail; most items offered at online retailers like iTunes and Amazon don’t sell well, but in aggregate they generate considerable income.

These figures are always reported as shocking, as if the normal order of things had been disrupted, as if the appearance of anything other than a completely linear distribution of money or messages or effort were a surprise of the highest order.
It’s not. Or rather, it shouldn’t be.
The Italian economist Vilfredo Pareto undertook a study of market economies a century ago and discovered that no matter what the country, the richest quintile of the population controlled most of the wealth. The effects of this Pareto distribution go by many names—the 80/20 rule, Zipf’s law, the power-law distribution, winner-take-all—but the basic shape of the underlying distribution is always the same: The richest or busiest or most connected participants in a system will account for much, much more wealth or activity or connectedness than average.

While Karl Marx argued that incomes would tend to diverge, with the rich getting richer while workers were kept poor, Alfred Marshall claimed the opposite: that incomes across society would tend to converge as the economy expanded. In the 1890s, however, the Italian engineer-turned-economist Vilfredo Pareto stepped back from theoretical debate and searched for a pattern in the data. Having gathered income and tax records from England and from German states, from Paris and Italian towns, he plotted them on a graph and saw a curiously striking pattern emerge. In each case, he found, around 80% of national income was in the hands of just 20% of people, while the remaining 20% of income was spread among 80% of people.

Weight follows a normal distribution, whereas wealth follows a power law distribution. With distribution of weight, average has meaning. With distribution of
wealth, average has little meaning.
Potpourri: This distribution of wealth was one of the first observations of the
power law distribution, known now as the Pareto principle.
The Italian economist Vilfredo Pareto observed in 1906 that 80 percent of the
land in Italy was owned by 20 percent of the population.
This was the basis for the 80–20 rule, which has cropped up in a variety of
disciplines, including real estate (80 percent of the houses are sold by 20 percent
of the realtors), quality control (80 percent of the problems are a result of 20 percent of the causes), sales (80 percent of the revenue is generated by 20 percent of
the employees), and information retrieval (80 percent precision means 20 percent
recall).

If you are powerful and well connected, that provides a platform for becoming even better connected and more powerful – and this virtuous circle becomes a vicious circle in the other direction for the poor. In airport networks Heathrow and JFK in New York are growing hubs; in banking networks the big banks grew ever bigger. The Italian economist Vilfredo Pareto calls this a ‘power curve’.50 He concludes that throughout history and across all societies, human organisation has been less of a social pyramid in which the gradation from one class to the next is gradual, and more of a ‘social arrow’. There has always been an enormous base at the bottom, occupied by the majority, and a very thin top.

(Banks weren’t necessarily interested in this specific question; rather, the idea was to use Mandelbrot’s research as proof of concept, to demonstrate how efficient a computer could be at number-crunching financial data.)
Income distribution had been studied before, most famously by a nineteenth-century Italian engineer, industrialist, and economist named Vilfredo Pareto. A strong believer in laissez-faire economics, Pareto was obsessed with the workings of the free market and the accumulation of capital. He wanted to understand how people got rich, who controlled wealth, and how resources were doled out by market forces. To this end, he gathered an immense amount of data on wealth and income, drawing on such diverse sources as real estate transactions, personal income data from across Europe, and historical tax records.

…

Mandelbrot was a central figure in identifying and exploring these relationships. See Mandelbrot (1997).
“Known as the Butcher of Lyon . . .”: For more on Barbie, see Bower (1984) and McKale (2012).
“. . . ‘there was no great distinction . . .’ ”: This quote is from Mandelbrot (1998).
“. . . and economist named Vilfredo Pareto”: The definitive collection on Pareto and his influence is the three-volume Wood and McClure (1999); see also Cirillo (1979).
“. . . it appeared that there was no ‘average’ rate of return”: In other words, it seemed that neither mean nor variance was defined for the distributions of cotton prices.

As William Gibson, who coined the term “cyberspace,” has said:
“The future is already here—it is just unevenly distributed.”
The 80/20 Principle: From Wall Street
to the Human Machine
This book is designed to give you the most important 2.5% of the tools you need for body recomposition and increased performance. Some short history can explain this odd 2.5%.
Vilfredo Pareto was a controversial economist-cum-sociologist who lived from 1848 to 1923. His seminal work, Cours d’économie politique, included a then little explored “law” of income distribution that would later bear his name: “Pareto’s Law,” or “the Pareto Distribution.” It is more popularly known as “the 80/20 Principle.”

The Art of Scalability: Scalable Web Architecture, Processes, and Organizations for the Modern Enterprise
by
Martin L. Abbott,
Michael T. Fisher

System’s tests almost always follow some
similar distribution when it comes to the amount or value of information provided.
This is because the features are not all used equally, and some are more critical than
others. A feature handling user payments is more important than one handling a
user’s search for friends, and thus can be tested more vigorously.
Vilfredo Pareto
Vilfredo Federico Damaso Pareto was an Italian economist who lived from 1848 to 1923 and
was responsible for contributing several important advances to economics. One of the most
notable insights that almost everyone has heard of today is the Pareto Distribution. Fascinated
by power and wealth distribution in societies, he studied the property ownership in Italy and
observed in his 1909 publication that 20% of the population owned 80% of the land, thus giving
rise to his Pareto Distribution.

Careers ploughed along deep and dedicated furrows: a start at Hula Hoops might be followed by promotion to Ridged Tortillas, a sideways shift to Baked Mini Cheddars, a management role at McVitie’s Fruitsters and a swan-song post at Ginger Nuts.
The unremitting division of labour resulted in admirable levels of productivity. The company’s success appeared to bear out the principles of efficiency laid down at the turn of the twentieth century by the Italian economist Vilfredo Pareto, who theorised that a society would grow wealthy to the extent that its members forfeited general knowledge in favour of fostering individual ability in narrowly constricted fields. In an ideal Paretan economy, jobs would be ever more finely subdivided to allow for the accumulation of complex skills, which would then be traded among workers.

…

They are shopkeepers, builders, cooks or farmers – people whose labour can easily be linked to the visible betterment of human life. As creatures innately aware of balance and proportion, we cannot help but sense that something is awry in a job title like ‘Brand Supervision Coordinator, Sweet Biscuits’ and that whatever the logic and perspicacity of Vilfredo Pareto’s arguments, another principle to which no one has yet given a convincing name has here been ignored and subtler human laws violated.
6.
Matters were compounded because, whatever the modesty of the ends at United Biscuits, the means to produce the Moments and their siblings nevertheless required the dedication and self-discipline that might otherwise have been called upon to run a hospital or become a ballerina.

Because the article was well-written and the premise seems to make sense, people started adding the phrase “long tail content” to their PowerPoint decks and using the term to ascribe all kinds of magical attributes to previously unsalable content. Not a disaster, just kind of fun to watch — in a schadenfreude kind of way.
In 1906, long before the long tail, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country. He observed that 20 percent of the people in Italy owned 80 percent of the wealth. In the 1940s, Dr. Joseph M. Juran attributed his own observation of “vital few and trivial many” to the 80/20 rule, which he called “Pareto’s Law” or the “Pareto Principle.”

…

To use Open, the viewer must click the Interactive button on the remote control, which brings up the Open home page offering various categorized selections. Video clips and audio often accompanies most screens alongside clickable data.
Paramount
A media company owned by Viacom.
Pareto’s Law
Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country. He observed that 20 percent of the people in Italy owned 80 percent of the wealth. In the 1940s, Dr. Joseph M.
Juran attributed his own observation of “vital few and trivial many” to the 80/20 rule, which he called “Pareto’s Law” or the “Pareto Principle.”

The eventual result would be a mature economy that was egalitarian and prosperous. Although he never put it so loftily, Kuznets in effect posited that growing equality of incomes was the mark of an advanced civilization. This conceit was elegant, stirring, and at odds with the existing paradigm, developed by the nineteenth-century French-Italian economist Vilfredo Pareto, that the shape of income distribution did not change over time.
Kuznets believed that income distribution did change shape, and he was right.15 But he was wrong in believing that after the initial inegalitarian phase of industrialization incomes would only grow more equal. Or rather, that conclusion is wrong today.

…

Income Distribution and Poverty in OECD Countries (Paris: Organisation for Economic Co-operation and Development, 2008), 27.
3. I would be remiss if I failed to note here the awkward debt that the science of income and wealth distribution owes to Italian fascism. Gini was president of Italy’s Central Institute of Statistics under Benito Mussolini. Another pioneer in the field was the French-Italian Vilfredo Pareto (1848–1923), inventor of an alternative measure called the Pareto distribution. Pareto was a dedicated Fascist who harbored truly repellant beliefs, but Gini appears to have been much less interested in politics than in statistics. Il Duce was an enthusiastic student of statistical science, presumably in the service of measuring whether the trains were in fact running on time (and other less praiseworthy efficiencies).

This may seem strange but, no matter what the other prisoner decides to do, each of them always gains a greater payoff by defecting. Since cooperating is strictly dominated by defecting, that is, since in any situation defecting is more beneficial than cooperating, defecting is the rational decision to take (Table 7). This sort of equilibrium qualifies as a Pareto-suboptimal solution (named after the economist Vilfredo Pareto, 1848-1923) because there could be a feasible change (known as Pareto improvement) to a situation in which no player would be worse off and at least one player would be better off. Unlike the other three outcomes, the case in which both prisoners defect can also be described as a Nash equilibrium: it is the only outcome in which each player is doing the best he can, given the available information about the other player's actions.

Then, by the 1990s, by construction there was no longer any call for offering courses in philosophy or history of doctrine, since there were no economists left with sufficient training (not to mention interest) in order to staff the courses.20 Economists would periodically be sounding off in the most illiterate registers concerning Karl Marx, Vilfredo Pareto, Hyman Minsky, Adam Smith, or even John Maynard Keynes, because they were confident no one would ever call them to task on their shallow pretenses.
Consequently, once the Great Mortification followed in the wake of the collapse of the Great Moderation, those occupying the commanding heights of the profession were bereft of any sophisticated resources to understand their predicament.

Notice that in both these cases there are large deviations for the most frequent entities (“the” for words and New York for cities). (40) Zipf’s law of rank-size distributions of words in the English language: the frequency of occurrence of words is plotted on the vertical axis and their rank plotted on the horizontal. (41) Rank-size distributions of companies in the United States: as in (39), their rank is plotted on the vertical axis and their size (the number of employees) plotted on the horizontal.
In economics, Zipf’s law actually predates Zipf. Much earlier it had been discovered by the influential Italian economist Vilfredo Pareto, who expressed it as a frequency distribution of incomes in a population rather than in terms of their ranking. This distribution, which is valid for many other economic metrics like income, wealth, and the size of companies, follows a simple power law with an exponent of approximately -2. When expressed in terms of rankings, this exponent corresponds to Zipf’s law.

Yet at a certain point, more effort causes our progress to plateau and even stall. It’s true that the idea of a direct correlation between results and effort is appealing. It seems fair. Yet research across many fields paints a very different picture.
Most people have heard of the “Pareto Principle,” the idea, introduced as far back as the 1790s by Vilfredo Pareto, that 20 percent of our efforts produce 80 percent of results. Much later, in 1951, in his Quality-Control Handbook, Joseph Moses Juran, one of the fathers of the quality movement, expanded on this idea and called it “the Law of the Vital Few.”2 His observation was that you could massively improve the quality of a product by resolving a tiny fraction of the problems.

Richard Branson tells the story of how in the early days his Virgin Atlantic airline got into problems, and he arrived home one Saturday morning to find the Coutts Bank manager on his doorstep demanding that Virgin’s entire overdraft be immediately repaid – which could have forced his business to cease trading. Branson worked the phones for the next twenty-four hours and repaid the bank on Monday morning.
‘Give me the fruitful error any time, full of seeds, bursting with its own corrections. You can keep your sterile truth for yourself’
Vilfredo Pareto
Similarly, early in his career as a manufacturer of drugs in France, one Thursday Jimmy Goldsmith faced the certainty of receivership for his fledgling commercial empire the following day. But luckily for him – remember, this was Paris – there was a bank strike the next day, so no one called in his loans, and he was able to use the time to scrape together enough money to survive and eventually become a billionaire, like Branson.

And hundreds of thousands have frequencies far less than one in a million, like kankedort, apotropaic, and deliquesce.
FIGURE 5–8. Probabilities of wars of different magnitudes, 1820–1997
Source: Graph from Cederman, 2003, p. 136.
Another example of a power-law distribution was discovered in 1906 by the economist Vilfredo Pareto when he looked at the distribution of incomes in Italy: a handful of people were filthy rich, while a much larger number were dirt-poor. Since these discoveries, power-law distributions have also turned up, among other places, in the populations of cities, the commonness of names, the popularity of Web sites, the number of citations of scientific papers, the sales figures of books and musical recordings, the number of species in biological taxa, and the sizes of moon craters.57
The second remarkable thing about power-law distributions is that they look the same over a vast range of values.

Economists have found that x in most developed countries equates to a number in the region of 80, meaning that eighty per cent of the society’s fortune pads the pockets of only twenty per cent of its members.
Naturally,the share will vary from person to person. Money is fickle, always changing owners. That different people have dissimilar wealth is not surprising. What surprises is the scale and constancy of the divide. The economist and mathematician Vilfredo Pareto, who first observed (at the end of the nineteenth century) that twenty per cent of Italians owned eighty per cent of the nation’s wealth, found nearly identical results when he studied the historical data from many other parts of Europe. The distribution of wealth in Paris since 1292, he discovered, had hardly moved at all.

In Chapter 7, I discussed the Italian statistician Corrado Gini and his famous coefficient. Although the Gini coefficient was intended to sum up inequality in a single number, it actually gives a simplistic, overly optimistic, and difficult-to-interpret picture of what is really going on. A more interesting case is that of Gini’s compatriot Vilfredo Pareto, whose major works, including a discussion of the famous “Pareto law,” were published between 1890 and 1910. In the interwar years, the Italian Fascists adopted Pareto as one of their own and promoted his theory of elites. Although they were no doubt seeking to capitalize on his prestige, it is nevertheless true that Pareto, shortly before his death in 1923, hailed Mussolini’s accession to power.

The conclusion is, as in Classical economics, that capitalism – or, rather, the market economy, as the school prefers to call it – is a system that is best left alone, as it has a tendency to revert to the equilibrium.
This laissez-faire conclusion of the Neoclassical school was further intensified by a critical theoretical development in the early twentieth century, intended to allow us to judge social improvements in an objective way. Vilfredo Pareto (1848–1923) argued that, if we respect the rights of every sovereign individual, we should consider a social change an improvement only when it makes some people better off without making anyone worse off. There should be no more individual sacrifices in the name of the ‘greater good’. This is known as the Pareto criterion and forms the basis for all judgements on social improvements in Neoclassical economics today.6 In real life, unfortunately, there are few changes that hurt no one; thus the Pareto criterion effectively becomes a recipe to stick to the status quo and let things be – laissez faire.

Because the marginalists thought the market was the perfect expression of human rationality, they had no problem – as long as it was only a thought experiment – with the idea that an all-knowing state could achieve the same results as a perfect market. ‘Both systems are not different in form and they lead to the same point,’ wrote the Italian economist Vilfredo Pareto in a celebrated textbook, ‘the result is extremely remarkable.’13
In 1908, his colleague Enrico Barone wrote a detailed account of how a socialist state could calculate the exact same outcomes that the market achieves blindly. Barone showed how it would be possible to discover, using linear equations, the most efficient forms of production, consumption and exchange.

Pareto and His Garden: 80/20 and
Freedom from Futility
What gets measured gets managed.
—PETER DRUCKER, management theorist, author of 31 books, recipient of Presidential Medal of Freedom
Four years ago, an economist changed my life forever. It’s a shame I never had a chance to buy him a drink. My dear Vilfredo died almost 100 years ago.
Vilfredo Pareto was a wily and controversial economist-cum-sociologist who lived from 1848 to 1923. An engineer by training, he started his varied career managing coal mines and later succeeded Léon Walras as the chair of political economy at the University of Lausanne in Switzerland. His seminal work, Cours d’economie politique, included a then little-explored “law” of income distribution that would later bear his name: “Pareto’s Law” or the “Pareto Distribution,” in the last decade also popularly called the “80/20 Principle.”

Even so, the development of the new economics has reacted against that
background of narrow globalization. It has been underpinned by a range of new disciplines and ideas that were emerging from economics itself, realizing that the classical
economics of William Stanley Jevons, Leon Walras and Vilfredo Pareto were based on
A BRIEF HISTORY OF THE NEW ECONOMICS
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the assumptions of Victorian physics, borrowing from Newtonian physics long after
it had been superseded by Einstein, using economic variables in their equations as if
they were equations in physics. They simply replaced energy with economic concepts,
when there was little evidence that energy and money or the economic concept of
‘utility’ behaved in the same way at all, as if people’s economic behaviour bore any
relation to the behaviour of atoms.

A power-law distribution. Although it decreases rapidly with k, it does so much slower than the normal distribution in figure 4.1, implying than large values of k are more likely.
The distribution of wealth in the United States, for instance, resembles a power law. The nineteenth-century Parisian engineer Vilfredo Pareto was the first person to note this phenomenon, subsequently called Pareto’s law, and demonstrated that it held true in every European country for which the relevant statistics existed. The law’s main consequence is that very many people possess relatively little wealth while a very small minority are extremely wealthy.

An excellent (but not impartial) review of the concept is given by the anthropologist Melford Spiro (1987), who in a recent autobiographical account describes why he changed his mind from an uncritical acceptance of the equal value of cultural practices to a much more qualified recognition of the pathological forms that cultures can occasionally assume. Philosophers and other humanists have often accused social scientists, sometimes with justification, of “debunking” absolute values that are important for the survival of culture (e.g., Arendt 1958, Bloom 1987). The early Italian-Swiss sociologist Vilfredo Pareto (1917, 1919) has been one of the scholars most keenly aware of the dangers of relativity inherent in his discipline.
English workers. The classic story of how the free English workers were transformed into highly regimented industrial laborers is told by the historian E. P. Thompson (1963).

The felicific calculus was designed to solve the knotty problem
of commensurability-how to weight my utility against yours, how
to decide whether greater aggregate happiness had been achieved.
Sadly, progress toward the felicific calculus remains elusive, and utilitarianism fell out of fashion amongst philosophers many years ago.
Pareto Efficiency
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Vilfredo Pareto, Walras's successor at Lausanne, believed, like the
utilitarians, that the welfare of society could be defined in terms of
the individual utilities of individual citizens or households. He was
content simply to list the utilities they achieved as a vector. So instead
of a vector that described picture quality, sound quality, etc., a vector
would list the welfare of the Smiths, the welfare of the J oneses, and so
on for all the households in the economy.

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The Critical Few
Typically, causes, inputs, or effort divide into two categories: (1) the majority, that have little impact, and (2) a small minority, that have a major, dominant impact.
—RICHARD KOCH, AUTHOR OF THE 80/20 PRINCIPLE
Vilfredo Pareto was a nineteenth-century economist and sociologist who was very interested in the topic of land ownership and the social distribution of wealth. After collecting and analyzing a great deal of data, Pareto found a curious Pattern: over 80 percent of the land in Italy was owned by less than 20 percent of the population.

Hudson, The (Mis)behavior of Markets: A Fractal View of Risk, Ruin, and Reward (New York: Basic Books, 2004), 150–59. The Zipf book mentioned is Human Behavior and the Principle of Least Effort: An Introduction to Human Ecology (Cambridge, Mass.: Addison-Wesley, 1949).
2. This field had been pioneered by Italian mathematical economist Vilfredo Pareto. Pareto made important contributions to equilibrium economics and Irving Fisher visited him during his European grand tour in 1894. He was appalled that Pareto’s wife smoked, but the two corresponded regularly afterward and Mrs. Pareto translated Fisher’s doctoral dissertation into Italian. Irving Norton Fisher, My Father Irving Fisher (New York: Comet Press Books, 1956), 65.

A MAGNITUDE BEYOND PARETO'S LAW
Pareto's law says that 80 percent of the benefit will depend on or go to 20 percent
of those engaged. This may be approximately true, though, more strikingly, 1 percent of
the population of the United States pays 28.7 percent of the income tax, suggesting that
as societies advance into the Information Age they will experience an even more skewed
distribution of incomes and abilities than Vilfredo Pareto observed at the end of the last
century. People are quite accustomed to substantial inequalities of wealth. In 1828, 4
percent of New Yorkers were thought to have owned 62 percent of all the city's wealth.
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By 1845, the top 4 percent owned about 81 percent of all corporate and noncorporate
wealth in New York City.

To those who balk at changing their ways we can only ask, along with Regis Philbin, “Who wants to be a millionaire?”
Investors I dealt with typically were not just millionaires but multimillionaires with fortunes of $5 million and up. How many households have reached these rarefied heights? The great Italian economist Vilfredo Pareto studied the distribution of income and in 1897 came up with a “power law” formula that seems then and now to describe fairly well how many top wealth holders in a modern society have reached various levels. To calibrate the formula we need just these two facts: The Forbes 400 cutoff for the United States, which was $1.55 billion in 2014, and the total wealth of those four hundred, an amazing $2.3 trillion.

There may not be an easily identifiable cause for a large share of the problems, but often there is an easy solution (not to all problems, but good enough; I mean really good enough), and such a solution is immediately identifiable, sometimes with the naked eye rather than the use of complicated analyses and highly fragile, error-prone, cause-ferreting nerdiness.
Some people are aware of the eighty/twenty idea, based on the discovery by Vilfredo Pareto more than a century ago that 20 percent of the people in Italy owned 80 percent of the land, and vice versa. Of these 20 percent, 20 percent (that is, 4 percent) would have owned around 80 percent of the 80 percent (that is, 64 percent). We end up with less than 1 percent representing about 50 percent of the total.

To the man who has made his millions—honestly or dishonestly as the case may be—we will give 10. To the man who has earned his thousands we will give 6; to such as just manage to keep out of the poor-house, 1, keeping zero for those who get in … So let us make a class of people who have the highest indices in their branch of activity, and to that class give the name of elite.’ Vilfredo Pareto, The Mind and Society (New York: Harcourt, Brace, 1935), par. 2027 and 2031. Those who follow this approach end up not with one elite, but with a number corresponding to the number of values they select. Like many rather abstract ways of reasoning, this one is useful because it forces us to think in a clear-cut way.